Liquidity in FX: Not All Prices are Created Equal

But as Roel Oomen, managing director, electronic FX spot trading at Deutsche Bank, explains, this does not mean that the transaction costs for dealing on each of those quotes is exactly the same.

This is because rejection rates can vary, the liquidity that’s shown at these quotes can vary, and the risk management style of the liquidity providers (LPs) in the aggregator might vary, with some externalising the risk and others internalising it. But how to tell the two apart?

As Oomen points out, clients can of course simply ask their LPs if they’re internalising or externalising risk.

“But simply being told that,‘yes, we internalise 90% of the flow’, is only a partial answer in terms of what you’re interested in,” he adds.

Oomen continues: “It may well be the case that a liquidity provider internalises 90%, but that doesn’t mean that they internalise 90% of your flow. And even if they were internalising 90% of your flow, it doesn’t mean that they internalise the same proportion of flow across the currency spectrum. So they might internalise 90% of euro/dollar and 100% of dollar/yen, but 50% of euro/Czech, for instance. So to make it very concrete and specific to the client, it’s often more helpful to look at impact charge or alpha profiles, ‘signatures’ as I call them.”

“It’s not because you don’t trust what they’re saying, but it’s that they’ll typically make statements about very high level statistics like internalisation ratios across the franchise which have only limited relevance to the individual clients that are interacting with them,” he says.